Monday, February 2, 2009

Set half-way down the hill to the Black River basin at the half-way point between Madison and Minneapolis is a brewery with a long history in the state. Built in 1856, it was one of the first breweries in the state and now, as if in tribute to some greater karma, is still helping to bring new beer to the people of Wisconsin. Originally built into the side of the hill by a Swiss gentleman named Ulrich Oderbolz, the current Sand Creek Brewing Company contains significant portions of this original, historic, brewery.

While we all dream of "accidentally" falling into a fermenting tank, falling into the boil kettle would be significantly worse: "On Feb. 15, 1888, 18-year-old Charley Oderbolz fell into a vat of boiling malt at the brewery, after losing his balance while standing on the edge. He fell forward full length, but managed to keep his head above water and climbed out. He was terribly scalded, and his clothing was removed, which only made matters worse by pulling skin off, and he lingered only until the following morning, when he died." In 1900, Ulrich's son Frank took over the brewery, but only 11 years later Frank would die in a boat that slipped over the falls for which the town in named. In 1911, Oderbolz was sold and became Badger Brewing Company, but was closed only 8 years later when Prohibition hit. During Prohibition the building operated as a poultry processing plant. In 1932 part of the building burned, though the first floor and cellars remained. It did not house an operating brewery again until 1995 when Dave and Jim Hellman started Pioneer Brewing Company and was part of the mid-1990s wave of Wisconsin craft breweries. Then in 1998, after Wauwatosa's Wisconsin Brewing Company was pummeled by floods, Pioneer purchased its brands and moved production of Wisconsin Brewing to Black River Falls.

In 1999, a mere 90 miles up the road in Downing, WI, Jim Wiesender and Cory Schroeder started up Sand Creek brewery. It grew quickly and within a few years they were looking for a bigger space than the shed on Cory's farm. The headbrewer at Pioneer, Todd Krueger, called them up and said that Pioneer was looking to sell. In one move Sand Creek expanded and acquired Pioneer's beers and Wisconsin Brewing Company's beers.

Instead of absorbing or eliminating these brands, Sand Creek has made the choice to keep the Pioneer, Wisconsin and Sand Creek brands distinct. As a result of this multiplicity, Sand Creek has a rather unique expertise in juggling brands. Combining that talent with excess capacity in the brewery, it was a natural fit for Sand Creek to take on brewing beers for others as well. According to Mr. Wiesender, contract brewing is around 30% of Sand Creek brewery's output.

So what is contract brewing? In general lay terms, it is commercial brewing at a facility that you don't own. As some in the industry say, it is "brewing your beer in someone else's stainless." Any time a beer is brewed somewhere other than a facility owned by the brewing company, there is a contract situation. There are two basic methods of contract brewing; confusingly, one is called "Contract Brewing", while the other is called "Alternating Proprietorship" (sometimes also called "Alternating Premises" or simply AP). The reason for the confusion is that AP is a relatively new paradigm for brewing with approval being granted for it only in the late-1990s. So, there is "contract brewing" as a general form of brewing, "Contract Brewing" as a specific and regulated method of contract brewing, and AP brewing, another specific form of contract brewing; in both instances, the beer is not brewed in equipment owned by the entity seeking to have the beer brewed.

As Mr. Wiesender notes, "building a brewery is an expensive proposition – contract brewing allows small upcoming craft brewers to check out the business and to see if their product or concept can make a run of it." Sand Creek runs a classic contract brewery and do no have any contracts in the AP form. "The materials that we use for the contract brewing are ones that we keep in stock and use for our own products. Our source for grain is primarily Briess and Hop Union for hops. … We make our recommendations and have some requirements to the type of packaging is used but for the most part the leg work, like finding distributors, suppliers etc is the responsibility of the client. We do offer bottling services and pretty much all of our clients take advantage of this service. The customer will design the label however I am the one who handles the submission to the TTB for approval." In this classic form, the Host brewery, the brewery that owns the equipment, generally provides the raw materials, the labor, the storage, the bottling, and the label approval. The beer in the tanks and bottles belongs to the Host. Of course, it is produced in accordance with a recipe and conditions provided by the Client. But, in a legal sense, the title to the beer does not transfer hands until the brewing process is complete and the beer is ready for distribution. In this sense, the beer, at all times prior to leaving the brewery, belongs to the Host. The Host is responsible for paying excise taxes; the Host is responsible for label approval. All of this is, of course, at the direction of the Client.

This is where some of the consumer distaste for "contract brewing" comes in. If the Host is brewing it and it is the Host's equipment, the Host's raw materials, the Host's employees, the Host's bottles, why should the Client get the credit for it? The easy answer is that the Host is basically a robot; the Host only does what the Client is telling him to do. If the Client gives bad instructions should we attribute this to the Host? On the other hand, if the Host does not maintain its equipment, should we hold this against the Client? These are questions that don't need to be asked when the brewery owns and brews on its own equipment.

Within the specific form of Contract Brewing there is a spectrum: from the very hands-off, to the very hands-on. On the one end, you have a situation like Esser's Best where the Client has a recipe. In Esser's case, not only did the current Client not develop the original recipe (it was a family heirloom), but it was written in German and he couldn't even read it. The Client is not a brewer; heck, the Client is not even a homebrewer. The Client had no prior knowledge of the brewing industry or brewing process. The Client took the recipe to the Host and said "Here, brew this for me please." And the Host took over from there, turning over bottles with the taxes paid when the Client takes possession of the bottles. The Client does not participate in the brewing process at all, indeed it is difficult to see how the Client could, in any way, provide instructions that would result in a high-quality beer. In such a case, it is difficult to really attribute anything other than a name to the Client.

On the other end of the Contract Brewing spectrum is Furthermore Beer. Headbrewer, Aran Madden, has a long history in the brewing industry; he apprenticed and brewed in a number of breweries before coming to Wisconsin. He brews all of his recipes on a home test system before they ever make it to the brewery. He attends, directs, and assists in the entire brewing process. In many ways, his interaction with the brewery is not a whole lot different than it would be if he owned the brewery. The only difference, in this case, is that it is the Host's raw materials (selected by Mr. Madden) and the Host's equipment (inspected for proper maintenance by someone who knows what they are looking at). In this case, it is difficult to see what, if anything, should be attributed to the Host. It is the exact opposite of the Esser situation, yet both are Contract beers; it is brewed on a Host's equipment and the Host, legally, holds title to the liquid before the Client takes possession to deliver to the distributor.

"Our clients truly are from all walks of life. Some are just business or marketing people with an idea for a beer. Others are folks testing the water to see if their business plan is a good go and their beer concept will work before they invest the large amounts of capital into building. … Several of my clients actually are very active participants in the brewing process and show up on brew day, pull grain, check gravities etc." Given this range of Client activity, it seems impossible to impose a single stereotype on all types of Contract beer; not to mention the additional, ethical, issues that arise with AP brewing.

Alternating Proprietorship (aka Alternating Premises) was developed by the wine industry to help vintners with low startup funds take advantage of vintners with excess capacity. It differs in one primary way from "Contract Brewing" – the Client, in this case called the Tenant, has title to the beer at all times during brewing process. Thus, the Tenant pays taxes and is responsible for label approvals. But again, there is a spectrum of AP brewing. On the one end, is the situation where the Client provides a recipe and raw materials and the Host's employees brew and bottle the beer according to the Tenant's instruction. On the other end, the Tenant provides its own employees and physically performs all steps of the brewing, bottling, and cleaning processes. It is hard to see any major distinction or practical point of differentiation between these types of AP brewing and the Esser/Furthermore situations.

One catch with AP brewing is the legal implications of title being in the Client. Labeling laws require that label bear the name of the brewery responsible for the beer – the title owner to the beer. Thus, Contract beer bears, somewhere on the label, the name of the Host brewery. AP beers, on the other hand, bear the name of the Tenant brewery. In this way, it can be even more confusing than Contract brewing because of the inherent confusion as to where the beer was actually brewed and by whom. To illustrate we need to only look at the Furthermore, Contract, situation versus an AP beer brewed mostly by the Host. In this case, Furthermore's bottles include both Furthermore's Spring Green identity and the Black River Falls brewing location. On the other hand, an AP beer brewed in a manner similar to the Esser situation would only need to include Esser's name and its home address, with no mention of the location of the physical place where the beer is brewed.

Here's a hypothetical to think about until Wednesday and in light of tomorrow's rather exciting podcast: An established but small-ish brewery is particularly well-known and has a strong local identity; it heavily markets and makes a strong connection to the specific location of its brewery. However, this brewery requires more capacity to brew a beer that has become unexpectedly popular. It is unsure if this beer's popularity will be sustained long enough to justify expansion of its own brewery, and in any case needs short term expansion to meet and capitalize on the increased demand. If you are responsible for making this business decision, do you choose a Contract situation or an AP situation? And why?